Sallie Mae throws the banks under the bus

The Washington Post has a fascinating tale today of student-loan behemoth Sallie Mae throwing in the towel—and abandoning its long-time frenemies in the banking industry—by more or less endorsing the Obama administration’s plan to put student lending in the hands of government. Sallie Mae’s tweak to the administration plan involves keeping the originating and servicing of the loans in the private sector—giving Sallie Mae a continued reason to exist. It may succeed, if only because having Sallie Mae on board will make the legislation much less of a fight.

My favorite passage in the article:

Other lending companies have been infuriated by Sallie’s proposal. John Dean, special counsel to the Consumer Bankers Association, a powerful student loan lobbying group, said the company’s plan, which he called “pornography,” would drive most banks out of the industry and strengthen Sallie Mae’s market share.

“Sallie Mae threw in the towel on the opportunity to defeat the Obama proposal,” Dean wrote in an e-mail to association members. “Since then it has dedicated its efforts to doing what it does best: Watching out for itself. When that entails throwing industry colleagues under a bus, Sallie Mae’s leadership does not hesitate.”

This occasions a couple of thoughts:

1) Divide-and-conquer is going to be the key to financial reform over the next few years. When the entire financial industry is against something—as it was with mortgage cramdowns—that something isn’t going to happen. But proposals that split the financial sector will have legs.

2) Over the past two decades, student lending became a textbook case of a privately run, government-subsidized program that delivered a worse, more-expensive result than a government-run program probably would have. (As is so often the case, Bethany McLean has the definitive account.) So now it looks like we’ll put the government completely in charge of student lending. Our entire financial system currently amounts to a privately run, government-subsidized program. I don’t think that means we should put the government in charge of all lending. I’m just sayin’ …